** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

 

**FORM 10-Q**

 

 

| **(Mark one)**                                                                                                |
|---------------------------------------------------------------------------------------------------------------|
|                                                                                                          |
| **ý****  Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                          |
| **For the quarterly period ended  March 31, 2002**                                                            |
|                                                                                                          |
| **OR**                                                                                                        |
|                                                                                                          |
| **o****  Transition report pursuant  to Section 13 or 15(d) of the Securities Exchange Act of 1934**     |
|                                                                                                          |
| **Commission File Number:  0-31151**                                                                     |

 

 

 

**RADVIEWSOFTWARE LTD.**

(Exact name of registrantas specified in its charter)

 

| **Israel**                       |   | **Not applicable**  |
|----------------------------------|--------|---------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer    |
| incorporation or  organization)  |   | Identification No.) |

 

**7 New England Executive Park**

**Burlington, MA 01803**

(Address of principalexecutive offices)

 

##### **Telephone Number (781)238-1111**

(Registrant’s telephonenumber, including area code)

 

**None**

(Former name, formeraddress and former fiscal year, if changed since last report)

 

 

 

                Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) Yes ý  No o, and (2) has been subject to such filingrequirements for the past 90 days:  Yes ý   No o.

 

                As of April 30,2002, there were 16,458,568 shares of the Registrant’s Ordinary Sharesoutstanding, excluding 134,000 Ordinary Shares held by the registrant astreasury shares that are “dormant” shares for purposes of Israeli law.

 

----

 

 

**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

Form 10-Q INDEX

 

** **

** **
| **PART I. FINANCIAL  INFORMATION** |
|------------------------------------|
|                               |   |
| Item 1.                            | Condensed Consolidated Financial Statements: |
|                               |   |
|                               | Condensed  Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 |
|                               |   |
|                               | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2002 and 2001 |
|                               |   |
|                               | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2002 and 2001 |
|                               |   |
|                               | Notes  to Condensed Consolidated Financial Statements |
|                               |   |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                               |   |
| Item  3.                           | Quantitative  and Qualitative Disclosures About Market Risk |
|                               |   |
| **PART II. OTHER INFORMATION**     |
|                               |   |
| Item 2.                            | Changes in Securities  and Use of Proceeds |
|                               |   |
|                               | Signatures |
|                               |   |

 

 

 

2

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**PARTI - FINANCIAL INFORMATION**

** **

**RADVIEWSOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share data)**

**(Unaudited)**

 
|                                                                                                                                                                            |   | **March 31,  2002** |   | **December  31, 2001** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|---------|
| **ASSETS**                                                                                                                                                                      |   |                |   |                   |    |
| Current Assets:                                                                                                                                                                 |   |                |   |                   |    |
| Cash and cash equivalents                                                                                                                                                       |   | $                   | 11,557 |                   | $       | 13,182 |   |
| Accounts receivable, net of reserves of $240 at March 31, 2002 and $209  at December 31, 2001                                                                                   |   | 1,172               |   | 1,445                  |    |
| Prepaid expenses and other current assets                                                                                                                                       |   | 406                 |   | 499                    |    |
| Total Current Assets                                                                                                                                                            |   | 13,135              |   | 15,126                 |    |
|                                                                                                                                                                            |   |                |   |                   |    |
| Property and Equipment, net                                                                                                                                                     |   | 1,478               |   | 1,687                  |    |
| Other Assets                                                                                                                                                                    |   | 584                 |   | 612                    |    |
|                                                                                                                                                                            |   |                |   |                   |    |
| Total Assets                                                                                                                                                                    |   | $                   | 15,197 |                   | $       | 17,425 |   |
|                                                                                                                                                                            |   |                |   |                   |    |
|                                                                                                                                                                            |   |                |   |                   |    |
| **LIABILITIES  AND SHAREHOLDERS' EQUITY**                                                                                                                                       |   |                |   |                   |    |
| Current Liabilities:                                                                                                                                                            |   |                |   |                   |    |
| Accounts payable                                                                                                                                                                |   | $                   | 496    |                   | $       | 413 |   |
| Accrued expenses                                                                                                                                                                |   | 2,042               |   | 2,351                  |    |
| Accrued restructuring charge, current portion                                                                                                                                   |   | 176                 |   | 70                     |    |
| Deferred revenue                                                                                                                                                                |   | 1,100               |   | 1,357                  |    |
| Total Current Liabilities                                                                                                                                                       |   | 3,814               |   | 4,191                  |    |
|                                                                                                                                                                            |   |                |   |                   |    |
| Long-term Liabilities:                                                                                                                                                          |   |                |   |                   |    |
| Accrued restructuring charge, less current portion                                                                                                                              |   | 148                 |   | 161                    |    |
| Accrued severance                                                                                                                                                               |   | 679                 |   | 722                    |    |
| Total Long-Term Liabilities                                                                                                                                                     |   | 827                 |   | 883                    |    |
|                                                                                                                                                                            |   |                |   |                   |    |
| Total Liabilities                                                                                                                                                               |   | 4,641               |   | 5,074                  |    |
|                                                                                                                                                                            |   |                |   |                   |    |
| Shareholders’ Equity:                                                                                                                                                      |   |                |   |                   |    |
| Ordinary shares, NIS 0.01 par value —  Authorized — 40,000,000 shares;  Issued — 16,592,568 shares at March 31, 2002 and 16,532,868 shares at  December 31, 2001 |   | 42                  |   | 42                     |    |
| Additional paid-in capital                                                                                                                                                      |   | 54,969              |   | 55,230                 |    |
| Deferred compensation                                                                                                                                                           |   | (976                | )      | (1,387                 |  ) |
| Accumulated deficit                                                                                                                                                             |   | (43,379             | )      | (41,434                | )       |
| Treasury shares, at cost — 134,000 shares                                                                                                                                  |   | (100                | )      | (100                   |    |
| Total Shareholders’ Equity                                                                                                                                                 |   | 10,556              |   | 12,351                 |    |
|                                                                                                                                                                            |   |                |   |                   |    |
| Total Liabilities and Shareholders’ Equity                                                                                                                                 |   | $                   | 15,197 |                   | $       | 17,425 |   |

 

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

 

 

3

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

**(Unaudited)**

 
|                                                          |                                                                                          | **Three Months Ended** |   |
|---------------------------------------------------------------|-----------------------------------------------------------------------------------------------|------------------------|--------|
|                                                          |                                                                                          | **March 31,**          |   |
|                                                          |                                                                                          | **2002**               |   | **2001** |   |
| Revenues:                                                     |                                                                                          |                   |   |   |   |
| Software  licenses                                            |                                                                                          | $                      | 978    |   | $ | 1,566 |   |
| Service                                                       |                                                                                          | 596                    |   | 737 |   |
| Total Revenues                                                |                                                                                          | 1,574                  |   | 2,303 |   |
|                                                          |                                                                                          |                   |   |   |   |
| Cost of  Revenues:                                            |                                                                                          |                   |   |   |   |
| Software  licenses                                            |                                                                                          | 13                     |   | 87 |   |
| Service                                                       |                                                                                          | 160                    |   | 325 |   |
| Total Cost of  Revenues                                       |                                                                                          | 173                    |   | 412 |   |
|                                                          |                                                                                          |                   |   |   |   |
| Gross Profit                                                  |                                                                                          | 1,401                  |   | 1,891 |   |
|                                                          |                                                                                          |                   |   |   |   |
| Operating  Expenses:                                          |                                                                                          |                   |   |   |   |
| Sales and  marketing                                          |                                                                                          | 1,438                  |   | 4,334 |   |
| Research and  development                                     |                                                                                          | 864                    |   | 1,842 |   |
| General and  administrative                                   |                                                                                          | 620                    |   | 931 |   |
| Stock-based  compensation (1)                                 |                                                                                          | 150                    |   | 298 |   |
| Nonrecurring  expenses (Note 4)                               |                                                                                          | 334                    |   | 237 |   |
| Total Operating  Expenses                                     |                                                                                          | 3,406                  |   | 7,642 |   |
|                                                          |                                                                                          |                   |   |   |   |
| Operating loss                                                |                                                                                          | (2,005                 | )      | (5,751 | ) |
|                                                          |                                                                                          |                   |   |   |   |
| Interest income,  net                                         |                                                                                          | 35                     |   | 277 |   |
| Other income,  net                                            |                                                                                          | 25                     |   | 21 |   |
|                                                          |                                                                                          |                   |   |   |   |
| Net loss                                                      |                                                                                          | $                      | (1,945 | ) | $ | (5,453 | ) |
|                                                          |                                                                                          |                   |   |   |   |
| Net loss per  share:                                          |                                                                                          |                   |   |   |   |
| Net loss per  share — Basic and diluted                  |                                                                                          | $                      | (0.12  | ) | $ | (0.33 | ) |
|                                                          |                                                                                          |                   |   |   |   |
| Weighted average  shares outstanding — Basic and diluted |                                                                                          | 16,433                 |   | 16,367 |   |
|                                                          |                                                                                          |                   |   |   |   |
|                                                          |                                                                                          |                   |   |   |   |
|                                                               |                                                                                          |                   |   |   |   |
| (1)                                                           | The following summarizes the departmental allocation  of the stock-based compensation charge: |                   |
| Sales and  marketing                                          |                                                                                          | $                      | 44     |   | $ | 158 |   |
| Research and  development                                     |                                                                                          | 61                     |   | 86 |   |
| General and  administrative                                   |                                                                                          | 45                     |   | 54 |   |
| Total  stock-based compensation                               |                                                                                          | $                      | 150    |   | $ | 298 |   |
|                                                               |                                                                                               |                        |        |  |  |  |  |  |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

 

4

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(In thousands)**

**(Unaudited)**

** **
|                                                                                   |   | **Three Months Ended** |   |
|----------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                   |   | **March 31,**          |   |
|                                                                                   |   | **2002**               |   | **2001** |   |
| Cash Flows from Operating Activities:                                                  |   |                   |   |   |   |
| Net loss                                                                               |   | $                      | (1,945 | ) | $ | (5,453 | ) |
| Adjustments to reconcile net loss to net cash  used in operating activities— |   |                   |   |   |   |
| Depreciation and amortization                                                          |   | 238                    |   | 261 |   |
| Fixed asset impairment write-off (Note 4)                                              |   | 16                     |   | — |   |
| Amortization of deferred compensation                                                  |   | 150                    |   | 298 |   |
| Accrued severance pay                                                                  |   | (43                    | )      | 31 |   |
| Changes in operating assets and liabilities—                                      |   |                   |   |   |   |
| Accounts receivable                                                                    |   | 273                    |   | 696 |   |
| Prepaid expenses and other current assets                                              |   | 93                     |   | (73 | ) |
| Accounts payable                                                                       |   | 83                     |   | (854 | ) |
| Accrued expenses                                                                       |   | (309                   | )      | 165 |   |
| Accrued restructuring charge                                                           |   | 93                     |   | — |   |
| Deferred revenue                                                                       |   | (257                   | )      | 64 |   |
| Net cash used in operating activities                                                  |   | (1,608                 | )      | (4,865 | ) |
|                                                                                   |   |                   |   |   |   |
| Cash Flows from Investing Activities:                                                  |   |                   |   |   |   |
| Purchases of property and equipment                                                    |   | (45                    | )      | (213 | ) |
| Decrease (increase) in other assets                                                    |   | 28                     |   | (51 | ) |
| Net cash used in investing activities                                                  |   | (17                    | )      | (264 | ) |
|                                                                                   |   |                   |   |   |   |
| Cash Flows from Financing Activities:                                                  |   |                   |   |   |   |
| Payment of long-term loans                                                             |   | —                 |   | (3,814 | ) |
| Net cash used in financing activities                                                  |   | —                 |   | (3,814 | ) |
|                                                                                   |   |                   |   |   |   |
| Decrease in cash and cash equivalents                                                  |   | (1,625                 | )      | (8,943 | ) |
|                                                                                   |   |                   |   |   |   |
| Cash and cash equivalents, beginning of period                                         |   | 13,182                 |   | 33,469 |   |
| Cash and cash equivalents, end of period                                               |   | $                      | 11,557 |   | $ | 24,526 |   |
|                                                                                   |   |                   |   |   |   |
| Cash paid during period for interest                                                   |   | $                      | 9      |   | $ | 53 |   |
|                                                                                   |   |                   |   |   |   |
| Supplemental disclosure of noncash financing and investing activities:                 |   |                   |   |   |   |
| Reversal of deferred compensation due to option forfeitures                            |   | $                      | 261    |   | $ | 794 |   |
|                                                                                   |   |                   |   |   |   |

 

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

 

 

5

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**1. ****Operations**

** **

RadView Software Ltd. (the “Company”) is an Israelicorporation.  The Company develops,markets and supports software that enables organizations to verify thescalability, efficiency and reliability of web applications, and facilitatestheir rapid development.

 

The Company has a history of incurring net losses andhad an accumulated deficit of approximately $43.4 million as of March 31,2002.  The Company has funded theselosses principally from proceeds from equity financing.  During the second half of 2001 and firstquarter of 2002, the Company restructured its business to significantly reducetotal operating expenses through reductions in workforce and the termination ofcertain leases.  Management believesthat existing cash and cash equivalents will be adequate to fund operationsinto 2003.

 

**2. ****SignificantAccounting Policies**

** **

TheCompany’s condensed consolidated financial statements are prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The significant policiesfollowed in the preparation of the condensed consolidated financial statements,applied on a consistent basis, are as follows:

 

*(a)*       Use of Estimates

 

The preparation of the financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities as of the date of the financial statements and the reported amountsof revenues and expenses during the reporting periods.  Actual results could differ from theseestimates.

 

*(b) Financial Statements in U.S.Dollars*

 

Theconsolidated financial statements of the Company have been prepared in U.S.dollars because the currency of the primary economic environment in which theoperations of the Company are conducted is the U.S. dollar. Substantially allof the Company’s sales are in U.S. dollars. Most purchases of materials,components and most marketing costs are denominated in U.S. dollars. Therefore,the functional currency of the Company is the U.S. dollar.

 

Transactionsand balances denominated in U.S. dollars are presented at their originalamounts. Transactions and balances in other currencies are translated into U.S.dollars in accordance with the principles set forth in the Financial AccountingStandards Board of the United States (“FASB”) Statement of Financial AccountingStandards (“SFAS”) No. 52, *Foreign CurrencyTranslation*. Accordingly, items have been translated as follows:

 

•                  Monetary Items  —At the exchangerate in effect on the balance sheet date.

•                  Nonmonetary Items  —Athistorical exchange rates.

•                  Revenue and Expense Items  —Atthe exchange rates in effect as of the date of recognition of those items(excluding depreciation and other items deriving from nonmonetary items).

 

All exchange gains and losses from the above-mentionedtranslation (which were immaterial for all periods presented) are reflected inthe statements of operations.  Therepresentative rate of exchange was U.S. $1.00 to 4.668 New Israeli Shekel(“NIS”) at March 31, 2002, U.S. $1.00 to NIS 4.416 at December 31, 2001, andU.S. $1.00 to NIS 4.192 at March 31, 2001.

 

 

 

6

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*(c)  Interim Financial Statements*

* *

Theaccompanying condensed consolidated balance sheet as of March 31, 2002 and the condensedconsolidated statements of operations and consolidated statements of cash flowsfor the three months ended March 31, 2002 and 2001, are unaudited but, in theopinion of management, include all adjustments, consisting of normal recurringadjustments, necessary for a fair presentation of results for these interimperiods.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the U.S. have beenomitted, although the Company believes that the disclosures included areadequate to make the information presented not misleading. The results ofoperations for the three months ended March 31, 2002 are not necessarilyindicative of the results to be expected for the entire fiscal year.  These financial statements should be read inconjunction with the consolidated financial statements and related notesincluded in the Company’s Form 10-K filed with the SEC on March 25, 2002.

 

*(d)  Principles of Consolidation*

* *

Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries in the United States, the United Kingdom, Germany andSweden.  All material intercompanybalances and transactions have been eliminated in consolidation.

 

*(e)  Revenue Recognition*

* *

The Company recognizes revenue in accordance withStatement of Position (“SOP”) 97-2, *SoftwareRevenue Recognition,* and SOP 98-9, *Modificationof SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions*. ****SOP 98-9********requires the use of the residual methodfor recognition of revenues when vendor-specific objective evidence exists forundelivered elements but does not exist for delivered elements of a softwarearrangement. If fair value for a delivered element does not exist but the fairvalue does exist for all undelivered elements, the Company defers the fairvalue of the undelivered elements and recognizes the remaining value for thedelivered elements.

 

Revenues from software product licenses are recognizedupon delivery of the software provided there is persuasive evidence of anagreement, the fee is fixed or determinable and collection of the relatedreceivable is probable. Revenues under multiple-element arrangements, which mayinclude software, software maintenance and training, are allocated to eachelement based on their respective fair values, based on vendor-specificobjective evidence. This objective evidence represents the price of productsand services when sold separately. Revenue is recognized for software licensessold to resellers or distributors at the time of shipment, provided that allrevenue recognition criteria set forth in SOP 97-2 are fulfilled.

 

Revenues from software maintenance agreements arerecognized ratably over the term of the maintenance period, which is typicallyone year. Revenues from training arrangements are recognized as the servicesare performed.

 

Amounts collected or billed prior to satisfying theabove revenue recognition criteria are reflected as deferred revenue.  Deferred revenue primarily representsdeferred maintenance revenue.

 

*(f)  Cash Equivalents*

* *

Cashequivalents are highly liquid investments with original maturities of less than90 days.  The Company accounts forinvestments under SFAS No. 115*, Accounting for Certain Investments in Debt andEquity Securities*.  UnderSFAS No. 115, investments for which the Company has the positive intent andability to hold to maturity, consisting of cash equivalents, are reported atamortized cost, which approximates fair market value.

 

 

 

7

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**3.  Earnings Per Share**

 

Basicand diluted net loss per share is presented in conformity with SFAS No. 128, *Earnings Per Share*, for all periodspresented.  Basic and diluted net lossper ordinary share was determined by dividing net loss attributable to ordinaryshareholders by the weighted average ordinary shares outstanding during theperiod.  Diluted net loss per ordinaryshare is the same as basic net loss per ordinary share for all periodspresented, as the effects of the Company’s potential additional ordinary shareswere antidilutive.

 

Thecalculation of diluted net loss per share excludes stock options to purchaseapproximately 2,809,000 ordinary shares as of March 31, 2002 and approximately3,575,000 ordinary shares as of March 31, 2001 because their inclusion would beantidilutive.

 

**4. ****NonrecurringExpenses**

 

Nonrecurring expensesconsist of restructuring charges and other nonrecurring costs.  For the three months ended March 31, 2002,nonrecurring expenses consisted of a restructuring charge of $334,000 incurredin January 2002.  Employee severance costs resulted from thetermination of 26 employees, of whom 13 were sales and marketing employees, 11were research and development employees, and 2 were general and administrativeemployees.  The following is areconciliation of the activity in the accrued restructuring charge for thethree months ended March 31, 2002.

 
| **Description**                  |   | **December 31,  2001** |   | **Provision** |   | **Payments and  Write-offs** |   | **March 31,  2002** |   |
|----------------------------------|--------|------------------------|--------|---------------|--------|------------------------------|--------|---------------------|--------|
|                             |   | **(in thousands)**     |   |
|                             |   |                   |   |          |   |                         |   |                |   |
| Employee severance costs         |   | $                      | — |          | $      | 218                          |   | $                   | (177   | ) | $ | 41 |   |
| Facility termination charges     |   | 231                    |   | 46            |   | (42                          | )      | 235                 |   |
| Fixed asset impairment           |   | —                 |   | 47            |   | (17                          | )      | 30                  |   |
| Vendor contract termination fees |   | —                 |   | 23            |   | (5                           | )      | 18                  |   |
|                             |   | $                      | 231    |          | $      | 334                          |   | $                   | (241   | ) | $ | 324 |   |
|                             |   |                   |   |          |   |                         |   |                |   |

Amountspayable within one year have been classified as a current liability in theaccompanying condensed consolidated balance sheets.

 

For the three months ended March 31, 2001,nonrecurring expenses consisted of a $237,000 payment to a landlord incurredupon the termination of a facility lease agreement in March 2001.

 

**5. Comprehensive Income (Loss)**

 

SFAS No. 130, *Reporting Comprehensive Income*, requiresdisclosure of all components of comprehensive income (loss) on an annual andinterim basis.  Comprehensive income(loss) is defined as the change in equity of a business enterprise during aperiod from transactions and other events and circumstances from nonownersources.  The Company’s comprehensiveloss is equal to its net loss for all periods presented.

 

**6. Disclosures About Segments of an Enterprise**

 

The Company has adopted SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information.*  SFASNo. 131 establishes standards for reporting information regarding operatingsegments in annual financial statements and requires selected information forthose segments to be presented in interim financial reports issued to shareholders.SFAS No. 131 also establishes standards for related disclosures about productsand services and geographic areas. Operating segments are identified ascomponents of an enterprise about which separate discrete financial informationis available for evaluation by the chief operating decision maker, ordecision-making group, in making decisions how to allocate resources and assessperformance.

 

 

 

8

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The Company’s chief operating decision makers, asdefined under SFAS No. 131, are the Chief Executive Officer and the ChiefFinancial Officer. To date, the Company has viewed its operations and has managedits business as principally one operating segment.

 

The Company’s revenues by geographic area are asfollows:
|            |   | **Three months  ended March 31,** |       |
|-----------------|--------|-----------------------------------|------------|
|            |   | **2002**                          |       | **2001** |   |
|            |   | **(in thousands )**               | ** ** |
|            |   |                              |       |   |   |
| United  States  |   | $                                 | 884        |   | $ | 1,673 |   |
| Europe          |   | 205                               |       | 295 |   |
| Israel          |   | 190                               |       | 147 |   |
| Other           |   | 295                               |       | 188 |   |
| Total  revenues |   | $                                 | 1,574      |   | $ | 2,303 |   |
|            |   |                              |       |   |   |

 

 

 

9

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

*Statements in this Quarterly Report on Form 10-Q concerningRadView’s business outlook or future performance; anticipated revenues,expenses or other financial items; product introductions and plans andobjectives related thereto; and statements concerning assumptions made orexpectations as to any future events, conditions, performance or other matters,are “forward-looking statements” as that term is defined under U. S. federalsecurities laws. Forward-looking statements are subject to various risks,uncertainties and other factors that could cause actual results to differmaterially from those stated in such statements. These risks, uncertainties andfactors include, but are not limited to: our history of losses; marketacceptance of our products; our ability to develop new products and enhance existingproducts; impact of significant competition; and other factors detailed inRadView’s filings with the Securities and Exchange Commission, including thisQuarterly Report on Form 10-Q.*

 

# **Overview**

 

RadView develops, markets and supports software thatenables companies to assure the scalability, efficiency and reliability of webapplications.  In 1997, we introducedour first web-testing product, WebLOAD, which was initially focused onassessing the scalability of web applications. Since then, we have enhanced the functionality of WebLOAD to provide anintegrated solution to assess the performance and accelerate the deployment ofweb applications.  In February 2000, weintroduced WebRM, which is designed to facilitate the systematic verificationof web application quality throughout the application development lifecycle andto accelerate the deployment of high performance web applications.  In August 2001, we introduced WebFT, atesting tool for verification of the functionality of web applications.

 

In January 2002, we restructured our business throughthe termination of 27% of the then current workforce.  As a result of the restructuring, we recorded a restructuringcharge of $334,000 in the first quarter of 2002 consisting of employeeseverance costs, idle lease facilities costs and fixed asset impairmentcosts.  We had previously taken costreduction actions in July and October 2001, including the termination of anaggregate of approximately 40% of our workforce and the termination of certainsales facilities leases.  As a result ofthese cost reduction actions, we expect that operating expenses will be lowerin 2002 than in 2001.

 

# **SignificantAccounting Policies**

 

***General***

 

We prepare our consolidated financial statements inconformity with accounting principles generally accepted in the U.S.  As such, we are required to make certainestimates, judgments and assumptions that we believe are reasonable based uponthe information available. These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the periodspresented.  To fully understand andevaluate our reported financial results, we believe it is important tounderstand our policies for revenue recognition and software development costs.

 

***Revenue Recognition***

 

We recognize software license revenues upon deliveryof our software to customers, provided persuasive evidence of an agreementexists, the fee is fixed or determinable and collection of the relatedreceivable is probable.  We allocate oursoftware license revenues under arrangements where we sell software andservices together under one contract to each element based on our relative fairvalues, with these fair values being determined using the price charged whenthat element is sold separately.  Iffair value for a delivered element does not exist but the fair value does existfor all undelivered elements, we defer the fair value of the undeliveredelements and recognize the remaining value for the delivered elements.

 

 

 

10

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We generally recognize software license revenues fromresellers or distributors at the time of shipment, provided that all otherrevenue recognition criteria set forth in governing statements of position onsoftware revenue recognition have been met. We recognize services revenues from software maintenance agreementsratably over the term of the maintenance period, typically one year.  We recognize services revenues from trainingas the services are performed. Amounts collected or billed prior to satisfyingthe above revenue recognition criteria are reflected as deferred revenue.

 

***SoftwareDevelopment Costs***

 

We account for software development costs inaccordance with SFAS No. 86, *Accounting forthe Costs of Computer Software to Be Sold, Leased or Otherwise Marketed*.  Software development costs incurred from thepoint of reaching technological feasibility until the time of general productrelease should be capitalized.  Wedefine technological feasibility as the completion of a working model.  Because we sell our products in a marketthat is subject to rapid technological change, new product development andchanging customer needs, we have concluded that technological feasibility isnot established until the development stage of the product is nearlycomplete.  For us, the period in whichwe can capitalize software development costs is very short, so the amounts thatcould be capitalized are not material to our financial statements.  Therefore, we have charged all such costs toresearch and development expense in the period incurred.

 

**Results of Operations**

 

The following table sets forth, as a percentage oftotal revenues, consolidated statement of operations data for the periodsindicated:

 
|                        |   | **Three Months Ended** |       |
|-----------------------------|--------|------------------------|------------|
|                        |   | **March 31,**          |       |
|                        |   | **2002**               | ** ** | **2001** | ** ** |
| Revenues:                   |   |                   |       |   |   |
| Software  licenses          |   | 62.1                   | %          | 68.0 | % |
| Services                    |   | 37.9                   | %          | 32.0 | % |
| Total revenues              |   | 100.0                  | %          | 100.0 | % |
|                        |   |                   |       |   |   |
| Cost of  revenues:          |   |                   |       |   |   |
| Software  licenses          |   | 0.8                    | %          | 3.8 | % |
| Services                    |   | 10.2                   | %          | 14.1 | % |
| Total cost of  revenues     |   | 11.0                   | %          | 17.9 | % |
|                        |   |                   |       |   |   |
| Gross profit                |   | 89.0                   | %          | 82.1 | % |
|                        |   |                   |       |   |   |
| Operating  expenses:        |   |                   |       |   |   |
| Sales and  marketing        |   | 91.4                   | %          | 188.2 | % |
| Research and  development   |   | 54.9                   | %          | 80.0 | % |
| General and  administrative |   | 39.4                   | %          | 40.4 | % |
| Stock-based  compensation   |   | 9.5                    | %          | 12.9 | % |
| Nonrecurring  charges       |   | 21.2                   | %          | 10.3 | % |
| Total operating  expenses   |   | 216.4                  | %          | 331.8 | % |
|                        |   |                   |       |   |   |
| Loss from  operations       |   | (127.4%                | )          | (249.7% | ) |
|                        |   |                   |       |   |   |
| Other income:               |   |                   |       |   |   |
| Interest income,  net       |   | 2.2                    | %          | 12.0 | % |
| Other income,  net          |   | 1.6                    | %          | 0.9 | % |
|                        |   |                   |       |   |   |
| Net loss                    |   | (123.6%                | )          | (236.8% | ) |
|                        |   |                   |       |   |   |

 

 

 

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**Three Months Ended March 31, 2002 and 2001**

*** ***

***Revenues***

* *

*Total Revenues*. Total revenues were $1.6million for the three months ended March 31, 2002 and $2.3 million for the sameperiod in 2001, which represents a decrease of $729,000, or 31.7%.  The decrease in total revenues was due to a$789,000 decrease in total revenues from customers in the U.S. offset, in part,by a $60,000 increase in total revenues from international customers.  Total revenues from U.S. customers decreasedfrom $1.7 million for the three months ended March 31, 2001 to $884,000 for thesame period in 2002 due to lower unit volume sales of software licenses and adecrease in service revenues.  Totalrevenues from international customers increased from $630,000 for the threemonths ended March 31, 2002 to $690,000 for the same period in 2002 due tohigher unit volume sales of software licenses and an increase in servicerevenues.

* *

*Software Licenses*.  Software license revenues decreased $588,000, or 37.5%, from $1.6million for the three months ended March 31, 2001 to $978,000 for the sameperiod in 2002.  This decrease was dueto a decrease of $595,000 in software license revenues from U.S. customers,offset, in part, by a $7,000 increase in software license revenues frominternational customers.  Total softwarelicense revenues from U.S. customers decreased from $1.1 million for the threemonths ended March 31, 2001 to $487,000, or 55.7%, for the same period in 2002due to lower unit volume sales attributable to weakness in the U.S. economy andslower technology spending.  Totalrevenues from international customers increased slightly from $484,000 for thethree months ended March 31, 2001 to $491,000 for the same period in 2002.

 

*Services*.  Service revenues decreased $141,000, or 19.1%, from $737,000 forthe three months ended March 31, 2001 to $596,000 for the same period in2002.  This decrease was due to a decreaseof $196,000 in support and maintenance services in the U.S., offset in part bya $55,000 increase in support and maintenance services from internationalcustomers for the three months ended March 31, 2002 as compared to the sameperiod in 2001.  The decrease in U.S.service revenues resulted from the decline in maintenance services and trainingservices that typically accompany software license orders.  The increase in international servicerevenues resulted from providing support and maintenance services to a largerinstalled customer base internationally.

 

***Cost of Revenues***

 

*Cost of Software Licenses*. Cost ofsoftware licenses consists principally of direct product costs, such as productmedia and packaging, as well as royalties due to third parties.  Cost of software licenses decreased from$87,000, or 5.6% of software license revenue, for the three months ended March31, 2001 to $13,000, or 1.3% of software license revenue, for the same periodin 2002.  This decrease was due to thecompletion of royalty obligations for third-party software in 2001.

 

*Cost of Services*. Cost of services consistsprincipally of personnel-related costs associated with customer support andtraining.  Cost of services decreasedfrom $325,000, or 44.1% of service revenue, for the three months ended March31, 2001 to $160,000, or 26.8% of service revenue, for the same period in2002.  This decrease was due to reducedpersonnel costs to provide support and maintenance services resulting from theheadcount reductions taken in the latter half of 2001 and the first quarter of2002.

 

***Operating Expenses***

 

*Sales and Marketing*.  Sales and marketing expenses consist principally of salaries andcommissions earned by sales personnel, travel and marketing program costs suchas trade shows, advertising and product promotion.  Sales and marketing expenses decreased from $4.3 million, or188.2% of total revenues, for the three months ended March 31, 2001 to $1.4million, or 91.4% of total revenues, for the same period in 2002.  The decrease was due primarily to a 61%reduction of headcount in sales and marketing personnel and a $713,000reduction in marketing program costs.

 

 

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*Research and Development*.  Research and development expenses consist principally of salariesand related expenses required to develop and enhance the Company’sproducts.  Research and developmentexpenses decreased from $1.8 million, or 80.0% of total revenues, for the threemonths ended March 31, 2001, to $864,000, or 54.9% of total revenues, for thesame period in 2002.  The decrease wasdue to a 40% reduction in headcount of research and development personnel.

* *

*General and Administrative*.  General and administrative expenses consistprincipally of finance, executive and administrative salaries and relatedexpenses, professional fees and other costs associated with being a publiccompany.  General and administrativeexpenses decreased from $931,000, or 40.4% of total revenues, for the threemonths ended March 31, 2001 to $620,000, or 39.4% of total revenues, for thesame period in 2002.  The decrease wasdue to a 61% reduction of headcount in general and administrative personnel.

 

*Stock-based Compensation*. Stock-based compensationexpense reflects the accounting charge relating to the issuance of equityinstruments to employees at an exercise price below fair market value and toall equity instruments issued to nonemployees. For stock options granted to employees, the difference between the exerciseprice and the estimated fair value of the ordinary shares on the date optionsare granted is charged to operations as stock-based compensation expense overthe vesting period of the underlying options. For stock options granted to nonemployees, the value of a particulargrant as determined by the Black-Scholes valuation model is charged tooperations as stock-based compensation expense over the service period orvesting period of the underlying option. Stock-based compensation expense was $150,000 for the three months endedMarch 31, 2002 compared to $298,000 for the same period in 2001.  The decrease resulted from the forfeiture ofemployee stock options for terminated employees for whom stock-basedcompensation was originally recorded.

 

Deferredcompensation on the unvested options is included as a component ofshareholders’ equity and amortized to stock-based compensation expense over thevesting period of the underlying options. Deferred stock-based compensation totaled $976,000 at March 31, 2002,and will result in additional charges to operations through May 2004.

 

*Nonrecurring Expenses*.  Nonrecurringexpenses for the three months ended March 31, 2002 consist of restructuringcharges of $334,000.  Nonrecurringexpenses for the three months ended March 31, 2001 consisted of a payment of$237,000 to a landlord incurred upon the termination of a facility leaseagreement in March 2001.

 

The $334,000 inrestructuring charges were incurred in January 2002, when we implementedadditional restructuring plans in an effort to lower operating costs.  We had previously taken cost reductionactions in July and October 2001, including the termination of an aggregate ofapproximately 40% of our workforce and the termination of certain salesfacilities leases.  The restructuringplans and related charges recorded in the first quarter of 2002 consisted ofseverance costs for terminated employees of $218,000, lease termination costsof $46,000, fixed asset impairment and other costs of $70,000.  A total of 26 employees were terminated, orapproximately 27% of the then current workforce, of whom 13 employees were fromsales and marketing, 11 employees were from research and development, and twoemployees were from general and administrative.

 

*Interest Income, Net*. Interest income, netconsists principally of interestexpense incurred in connection with long-term debt, offset by interest earnedon cash investments.  Interest income,net was $35,000 for the three months ended March 31, 2002 compared to $277,000for the same period in 2001.  Thedecrease in interest income resulted from lower invested cash balances andlower interest rates in 2002 when compared to 2001.

 

*Other Income, Net*. Other income, net consistsprincipally of currency translation gains and losses. There was other income of$25,000 for the three months ended March 31, 2002 compared to $21,000 for thesame period in 2001.  This change wasdue to exchange rate fluctuations.

 

*Income Taxes.*  The Company has estimated net operating losscarryforwards for Israeli tax purposes totaling approximately $14.1 millionthrough March 31, 2002 that would reduce future Israeli income taxes, if any.These net operating losses may be carried forward indefinitely and offsetagainst future taxable income.  TheCompany expects that during the period in which these tax losses are utilizedits income would be substantially tax exempt. Therefore,

 

 

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the income tax rate ofthe Company during the tax-exempt period will be zero. There will be no taxbenefit available from these losses and no deferred income taxes have beenincluded in the Company’s financial statements.

 

TheCompany’s U.S. subsidiary has net operating loss carryforwards for U.S. Federaland state tax purposes totaling approximately $22.3 million through March 31,2002.  These losses are available tooffset any future U.S. taxable income of the U.S. subsidiary and will expirebetween 2012 and 2022.  The Company hasrecorded a full valuation allowance against its deferred tax asset due to theuncertainty surrounding the ability and the timing of the realization of thesetax benefits.

 

**Liquidity and Capital Resources**

 

Cashand cash equivalents totaled $11.6 million as of March 31, 2002 compared to$13.2 million as of December 31, 2001.

 

Cash used in operatingactivities was $1.6 million for the three months ended March 31, 2002 and $4.9million for the same period in 2001.  Cash used in operating activities for thethree months ended March 31, 2002 was due to a net loss of $1.9 million, adecrease of $309,000 in accrued expenses, a decrease of $43,000 in accruedseverance pay, and a decrease of $257,000 in deferred revenue, offset, in part,by depreciation of $238,000, amortization of deferred compensation of $150,000,other non-cash charges of $16,000, a decrease of $273,000 in accountsreceivable, a decrease of $93,000 in prepaid expenses, an increase of $83,000in accounts payable and an increase of $93,000 in accrued restructuringcharge.  Cash used in operating activitiesfor the three months ended March 31, 2001 was due to a net loss of $5.5million, an increase of $73,000 in prepaid expenses, and a decrease of $854,000in accounts payable, offset, in part, by depreciation of $261,000, amortizationof deferred compensation of $298,000, other non-cash charges of $31,000, adecrease of  $696,000 in accountsreceivables, an increase of $165,000 in accrued expenses and an increase of$64,000 in deferred revenue.

 

Cashused in investing activities was $17,000 for the three months ended March 31,2002 and $264,000 for the same period in 2001. Cash used in investing activities for the three months ended March 31,2002 was primarily for purchases of $45,000 in property and equipment, offset,in part, by a decrease of $28,000 in other assets.  Cash used in investing activities for the three months endedMarch 31, 2001 was primarily for purchases of $213,000 in property andequipment and an increase of $51,000 in other assets.

 

Therewas no cash used in financing activities for the three months ended March 31,2002.  Cash used in financing activitiesfor the three months ended March 31, 2001 consisted of $3.8 million for therepayment of long-term loans with a bank.

 

InApril 2001, our board of directors approved a stock repurchase program underwhich we may repurchase our ordinary shares for an aggregate consideration thatshall not exceed $2.5 million. Purchases may be made based on market conditions from time-to-time atthe discretion of management in open market purchases or privately negotiatedtransactions.  Through March 31, 2002,we repurchased 134,000 of our ordinary shares at an aggregate cost of $100,000.

 

We lease all of our office facilities undernoncancellable operating leases that expire over varying terms through2005.  As of March 31, 2002, the futuretotal lease payments under these leases were as follows: $471,000 in 2002,$511,000 in 2003, $517,000 in 2004, and $166,000 in 2005.

 

Weexpect that operating expenses, as well as planned capital expenditures, willconstitute a material use of our cash resources.  We believe that our existing cash and cash equivalents will besufficient to meet our anticipated needs for working capital and capitalexpenditures for at least the next 12 months. We may find it necessary to obtain additional equity or debt financing.  In the event additional financing isrequired, we may not be able to complete financing on acceptable terms or atall.

 

 

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**ITEM3.  QUALITATIVE AND QUANTITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The Company does not use derivative financial instruments in itsinvesting portfolio.  The Company placesits investments in instruments that meet high credit quality standards such asmoney market funds, government securities, and commercial paper.  The Company limits the amount of creditexposure to any one issuer.  The Companydoes not expect any material loss with respect to its investment portfolio.

 

The Company conducts business in various foreigncurrencies, primarily in Europe and the Middle East.  As a result, the Company is exposed to the effect of foreigncurrency exchange rate fluctuations on the U.S. dollar value of foreigncurrency-denominated revenues and expenses. The Company does not use foreign exchange forward contracts to hedge itsforeign currency denominated receivables. Looking forward, there can be no assurance that changes in foreigncurrency rates, relative to the U.S. dollar, will not materially adverselyaffect the consolidated results of the Company.

** **

**PART II - OTHER INFORMATION**

** **

**Item2.  Changes in Securities**

** **

**(d) Use of Proceeds from Sale of Registered Securities**

** **

OnAugust 9, 2000, in connection with our initial public offering, the Securitiesand Exchange Commission declared effective a Registration Statement on Form F-1(No. 333-41526) that registered 5,750,000 ordinary shares.  The managing underwriters in the offeringwere Donaldson Lufkin Jenrette, Wit SoundView, Piper Jaffrey, and DLJdirect.

 

On August 15, 2000, we sold 4,000,000 of such ordinaryshares at an initial public offering price of $10.00 per share, generatinggross offering proceeds of $40 million. After deducting $2.8 million in underwriting discounts and approximately$1.9 million in other related expenses, the net proceeds to us wereapproximately $35.3 million.

** **

Through March 31, 2002, we have used $23.7 million ofthe net proceeds from our initial public offering as follows:

•                  $1.6 million for capital expenditures;

•                  $1.4 million for repayment of principal and accrued interest on a loanwith Rad Data Communications, Inc., a related party;

•                  $3.8 million for repayment of principal and accrued interest onlong-term debt with a bank;

•                  $100,000 for the repurchase of ordinary shares; and

•                  $16.8 million for working capital.

 

 

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**SIGNATURES**

 

 

Pursuant to the requirements of the Securities andExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 

RADVIEW SOFTWARE LTD.

(Registrant)

 

 

Brian E. LeClair

Vice President and ChiefFinancial Officer

 

Dated:  May 10, 2002

 

 

 

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